Educating the Masses to Help You Save On Taxes

More Americans are headed back to school, Federal tax deductions help with the expense

So far we’ve discussed the American Opportunity Tax Credit (modified Hope Credit), the Lifetime Learning Credit and even Tuition & Fee Deductions. Today though, we’re going to cover the last in our 4 part series on education tax incentives—Student Loan Interest Deduction. The great thing about this deduction is that you can take this deduction even if you qualify for the other tax credits or deductions!

The Goods – Part 4

Usually personal interest paid on loans (other than certain mortgage interest) is not deductible. However, there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. This gives taxpayers with an adjusted gross income (MAGI) that is less than $70,000 ($145,000 if filing a joint return) the option to deduct interest on student loans from gross income, up to $2,500.

Highlights:

• Student must attend school at least 1/2 time
• The loan must be used to pay qualified education expenses for you, your spouse, or a person who was your dependent when you took the loan
• Interest must have been paid or incurred within a reasonable period of time before or after you took the loan
• You can claim this deduction even if you do not itemize deductions on Form 1040′s Schedule A
• Interest deduction can be applied to loans for graduate school

Qualified Education Expenses:

• Tuition & fees
• Room & board  (no greater than the cost included of attendance for a particular academic period & living arrangement of the student (determined by education institution), or the actual amount charged for resident housing operated by the educational institution)
• Books, supplies & equipment
• Other necessary expenses (such as transportation)

One caveat, the taxpayer cannot deduct student loan interest of a dependent unless the loan is in the taxpayer’s name. Also, loans from a related person or through a qualified employer plan are not qualified student loans for this deduction.

Side Note: Loan interest is completely separate. In fact, you can report both interest and tuition while attending the same school. This happens with many grad students who are paying interest on a school loan but still attending classes at the same college.

If this series has helped you make the decision to go back to school, we’d love to hear about it!